What happens to my deferred compensation if I die?

What happens to my deferred compensation if I die?

When an employee dies, deferred compensation may be due and payable to the employee’s beneficiary or estate. Employers are often tripped up by the corresponding tax reporting and withholding requirements and whether income tax and FICA tax withholdings are due from such payments.

What is the difference between a 401k and a deferred compensation plan?

Deferred compensation plans are funded informally. There is essentially just a promise from the employer to pay the deferred funds, plus any investment earnings, to the employee at the time specified. In contrast, with a 401(k) a formally established account exists.

Is inherited deferred compensation taxable?

You are correct, since your father died in the year prior to the proceeds being paid out, the proceeds are not subject to FICA taxes. They are taxable as ordinary income.

Are deferred compensation contributions tax deductible?

In general, the amounts are deductible by the employer when the amount is includible in the employee’s income. Interest or earnings credited to amounts deferred under nonqualified deferred compensation plans do not qualify as interest deductible under IRC ยง 163.

Is deferred compensation reported on w2?

Distributions to employees from nonqualified deferred compensation plans are considered wages subject to income tax upon distribution. Since nonqualified distributions are subject to income taxes, these amounts should be included in amounts reported on Form W-2 in Box 1, Wages, Tips, and Other Compensation.

How are deferred comp plans taxed?

You are taxed immediately on all of the deferrals made under the plan, even if you have only receive a portion of it. You are taxed on interest at a rate that is one percentage point higher than the penalty on underpayments.

What is the difference between a qualified and nonqualified deferred compensation plan?

Qualified plans have tax-deferred contributions from the employee, and employers may deduct amounts they contribute to the plan. Nonqualified plans use after-tax dollars to fund them, and in most cases employers cannot claim their contributions as a tax deduction.

How do I set up a non qualified deferred compensation plan?

To set up a NQDC plan, you’ll have to: Put the plan in writing: Think of it as a contract with your employee. Be sure to include the deferred amount and when your business will pay it. Decide on the timing: You’ll need to choose the events that trigger when your business will pay an employee’s deferred income.

Can I rollover my nonqualified deferred compensation plan?

But there are downsides to NQDC plans. For example, unlike 401(k) plans, you can’t take loans from NQDC plans, and you can’t roll the money over into an IRA or other retirement account when the compensation is paid to you (see the graphic below). NQDC plans aren’t just for retirement savings.